In Project Blue v HMRC [2018] UKSC 30 (13 June 2018), the Supreme Court found (one lord dissenting) that, although the combination of Finance Act 2003 s 45 and s 71A brought the stamp duty land tax (SDLT) due to nil, the effect of s 75A was that SDLT was payable.
The issue was the SDLT payable on the purchase of the Chelsea Barracks from the Ministry of Defence (MoD) by Project Blue (PBL), using an Ijara lease, which is a form of Sharia compliant financing (as opposed to an interest-bearing loan). The sale comprised the following steps:
There were two issues: whether both sub-sale relief (s 45) and the exemption for alternative property finance (s 71A) applied; and, if so, how s 75A (the SDLT anti-avoidance provision) should apply to the transaction.
It was accepted that, as a result of s 45, the completion of the contract between the MoD and PBL was disregarded, and that s 71A could cover the arrangements between PBL and MAR. The central question was therefore the interaction between s 45 and s 71A, and particularly the identification of the ‘vendor’ under s 71A. The UT had found that PBL was the vendor under s 71A, whilst the Court of Appeal considered that the vendor could not be PBL because the transaction between the MoD and PBL fell to be disregarded under s 45.
The Supreme Court found that the vendor was PBL, so that MAR’s purchase of the barracks from PBL was exempt as a result of the combination of s 45 and s 71A. The court observed that s 71A uses ‘real world’ language and that whether the ‘customer’ of the financing arrangement (here PBL) has incurred a liability to SDLT before entering into the Ijara arrangements is not relevant to the applicability of s 71A. This approach is consistent with the aim of s 71A, which is to equate Ijara financing with conventional lending. There is nothing in the wording of s 71A, which suggests that the exemption will not apply where the sale by the customer to the financial institution is a sub-sale. Finally, this approach ensures that, in cases where the financial institution purchases the property from its customer, SDLT is not charged on the amount provided by the financial institution, but rather on the actual purchase price paid by the customer.
As to the application of s 75A, like the FTT, the UT and the Court of Appeal, the Supreme Court found that it was not precluded by the fact that it was not established that PBL had entered into the arrangements for tax avoidance purposes. The court observed, inter alia, that there is nothing in the body of the section which expressly or inferentially refers to motivation. It is sufficient, for the operation of s 75A, that a reduced liability results from the series of transactions put in place by the parties. Furthermore, the mischief the section addresses leads to the identification of V and P in each particular case (where one person (V) disposes of a chargeable interest and another person (P) acquires either it or a chargeable interest deriving from it). In the ‘real world’, PBL had acquired the barracks with the benefit of finance from MAR and the loophole which it had used was the combination of s 45 and s 71A; PBL was therefore P for the purpose of s 75A.
Finally, the chargeable transaction on the notional transaction was £1.25bn, as this was the largest amount paid under the arrangements. This was, however, subject to PBL’s right to claim a refund under s 80, if the consideration paid by MAR to PBL before the Ijara arrangement was brought to an end, was less than the amount paid by PBL to the MoD.
Why it matters: The SDLT at stake was £50m and the Supreme Court’s decision is not unanimous and reverses the Court of Appeal’s decision. In this context, the words of Lord Hodge ring particularly true: ‘I recognise the difficulty in interpreting the legislation which has been subjected to incremental amendments and additions since FA 2003, as Parliament has struggled to optimise this new tax.’ Fortunately, since March 2011, the issue of the interaction of s 45 and s 71A no longer arises as a result of an amendment to s 45.
Writing in Tax Journal (21 June 2018), Liz Wilson (Squire Patton Boggs) observed: ‘The SDLT planning at the heart of this particular case has already been blocked by changes made to the sub-sale relief rules, but the case remains instructive for the light it sheds on HMRC’s ability to use s 75A whenever a series of transactions combine to produce less SDLT than would otherwise have been payable on a notional simple transaction. The Supreme Court judgment is only likely to embolden HMRC further in seeking to invoke s 75A.
‘This rather unsatisfactory state of affairs allows HMRC to apply a provision that is widely (but now wrongly) understood to be a “normal” anti-avoidance rule, in any given set of circumstances where more SDLT could have been charged. Avoidance motive or not, deliberate or not, if HMRC can postulate a “notional arrangement” where the chargeable consideration “payable” exceeds the amount that would otherwise be payable, it could trigger s 75A.
‘Project Blue, therefore, is a case that necessitates a further recalibration in our understanding of where the boundary between acceptable tax planning and unacceptable tax avoidance lies. Despite reassurances in its published guidance that it will not apply s 75A if the “right” result of SDLT has been paid, the question remains on who decides (and how) what the “right” amount of SDLT is.’
In HMRC v P Newey (t/a Ocean Finance) [2018] EWCA Civ 791 (17 April 2018), the Court of Appeal decided to remit the case to the FTT, suggesting that the CJEU, on referral of the case after the FTT’s decision, had adopted a new approach to the application of the Halifax doctrine (Case C-255/02).
Ocean Finance made exempt supplies of financial services in the UK and was therefore unable to recover VAT incurred, in particular, on advertising services. On the advice of its accountants, the business had restructured so that it was carried out by a Jersey incorporated company, Alabaster, to which the advertising services were supplied. These services were outside the scope of VAT as they were supplied outside the UK. In all other respects, the business carried on as before. The loan broking services were still provided to third party lenders in the UK, in respect of loans made to UK resident customers recruited through advertising which was placed only in the UK.
The issue was whether the restructuring constituted an abuse of law under the Halifax doctrine. Both the FTT and the UT had found in favour of Ocean Finance. The Court of Appeal pointed to the CJEU’s comment in the present case that it was ‘conceivable that the effective use and enjoyment of the services at issue in the main proceedings took place in the United Kingdom and that Mr Newey profited therefrom’. The CJEU had concluded: ‘It is for the referring court, by means of an analysis of all the circumstances of the dispute in the main proceedings, to ascertain whether the contractual terms do not genuinely reflect economic reality.’
The court observed that Alabaster had been established with the sole object of providing supplies of loan broking services to UK customers but that the freedom of a trader to structure his business in a tax-effective manner had been ‘repeatedly recognised’ by the courts. The question was therefore whether it made any difference that Alabaster had been incorporated ‘as part of a tax avoidance scheme’.
The court considered that the CJEU’s decision required an assessment of the ‘question of artificiality’ by reference to the business relationships actually entered into by Mr Newey, Alabaster, lenders and the advertising company, and in particular, to the role of Mr Newey. This fact finding analysis would be best conducted by the FTT.
Why it matters: The Court of Appeal concluded: ‘There is no exact precedent of which I am aware in the earlier European case law, let alone as it stood before the FTT hearing in February 2010, for treating together the issues of characterisation of the supplies and the doctrine of abuse of law as the CJEU has done in the present case.’ In the view of the Court of Appeal, the CJEU’s decision changed the way the Halifax principle should be applied. It will be interesting to see how the FTT will apply this new approach, which seems to bring the Halifax doctrine close to the Ramsaydoctrine applicable to direct tax cases.
Writing in Tax Journal (10 May 2018), Michael Conlon QC made the following points (inter alia):
In A/S Bevola and Jens W. Trock ApS v Skatteministeriet (Case C-650/16) (12 June 2018), the CJEU found that the reasoning of its Marks & Spencer decision (Case C-446/03) applies to the losses of a foreign permanent establishment.
Bevola was incorporated in Denmark and produced ranges of products for wagons and trailers. It was a member of a group whose ultimate parent, Jens W. Trock, was also a Danish company.
Bevola’s Finnish establishment had closed in 2009 with losses, which it contended could not be deducted in Finland. It had therefore applied to set off these losses against its taxable profits in Denmark but its application had been turned down by the Danish tax authorities on the ground that Danish law did not allow the set off of losses realised by a permanent establishment situated outside Denmark.
The issue was whether Danish law was in breach of TFEU art 49 (freedom of establishment), since losses realised by a permanent establishment in Denmark could have been set off against taxable profits realised in Denmark.
The CJEU observed that the relevant Danish provision meant that a resident company with a permanent establishment in another member state is in a less favourable position than it would be if the permanent establishment was in Denmark. As established in Lidl (Case C-414/06), this difference in treatment could discourage a Danish company from carrying on its business through a permanent establishment situated in another member state.
The difference in treatment would not, however, constitute a restriction of the freedom of establishment if it did not apply to objectively comparable situations. In this respect, the court observed that the profits of a foreign permanent establishment of a Danish company are not taxable in Denmark. This may constitute an advantage in certain circumstances; however, in a situation such as Bevola’s, it is a disadvantage. The court also noted that the ultimate parent company of a Danish group can opt for international joint taxation and decide that all the companies in the group, resident or non-resident, including their permanent establishments and real property, inside or outside Denmark, are to be taxable in Denmark. However, as this option is subject to strict conditions, the court considered that the difference in treatment concerned situations which were objectively comparable.
The court accepted that the measure at issue may be justified to safeguard the balanced allocation of taxing powers, and more particularly, the necessity to avoid double deductions of taxes. However, it noted that, in circumstances where a set-off of losses is no longer possible in the country of the permanent establishment, the risk of double deduction no longer exists.
The CJEU concluded that the reasoning of Marks & Spencer in relation to the losses of foreign subsidiaries could apply equally to the losses of permanent establishments in circumstances where it is established that the losses are ‘definitive’; i.e. cannot be relieved in future accounting periods.
Why it matters: In this ground breaking decision, the CJEU has now confirmed that definitive losses of a permanent establishment in one member state can be set-off against profits of the company it belongs to, even if that company is incorporated in a different member state. On the basis of this decision, several provisions of CTA 2010 may need to be amended.
Writing in Tax Journal (29 June 2018), Tim Sarson noted that in addition to the CJEU concluding that the Danish legislation was contrary to the freedom of establishment, ‘the CJEU also clarified the applicability of the “Marks & Spencer exception”, ruling that the losses attributable to a foreign PE become definitive when firstly, all possibilities of deducting those losses that are available under the law of the PE’s residence state have been exhausted and, secondly, the company has ceased to receive any income from that PE.’
In Leekes v HMRC [2018] EWCA Civ 1185 (23 May 2018), the Court of Appeal (agreeing with the UT and disagreeing with the FTT) found that s 343 relief was only available against profits of the predecessor’s trade which was deemed to have been continued by the successor, and not in relation to the enlarged successor’s trade.
Leekes ran department stores. In November 2009, it had purchased the entire share capital of Coles, which ran furniture stores and warehousing facilities. Coles had losses in that tax year, as well as carried forward losses. Coles’ business had then been hived up to Leekes and Coles had become dormant. Leekes had refurbished the stores previously owned by Coles and rebranded them as Leekes stores.
In its corporation tax return for the year ended 31 March 2010, Leekes had offset Coles’ losses against its own trading profits, on the basis that it had succeeded to Coles’ trade (ICTA 1988 s 343). HMRC accepted that there had been a succession; however, it considered that set off was only available against any income generated by what was formerly Coles’ business. If HMRC was correct, no relief was available in the relevant year because that part of the enlarged business taken over by Leekes from Coles remained unprofitable.
The parties had agreed the following formulation of the issue: ‘Where a company succeeds to a trade of a predecessor in which losses have been incurred and that trade forms part of a larger trade carried on by the successor including its existing trade, how does ICTA 1988 s 343(3) apply to the successor in relation to carry-forward loss relief for those losses?’
The Court of Appeal observed that ‘the gateway to s 393(1) is opened for the successor, in respect of the accumulated losses of the trade which it has acquired and begun to carry on for itself. The next question is one of quantum: for how much of the accumulated losses of the predecessor is the successor entitled to obtain relief?’ To answer that question, the Court of Appeal referred to the second limb of s 393(1): the successor is entitled to relief ‘for any amount for which the predecessor would have been entitled to relief if it had continued to carry on the trade’. The court considered that the ‘trade’ could not be Leekes’ enlarged trade but only the trade deemed to have continued; Coles’ trade. The ‘deemed continuity’ only applied to Coles’ trade, so that relief could only be obtained if and to the extent that Leekes derived trading profits from Coles’ former trade.
The court added that Leekes’ approach would place the successor in a more favourable position than the predecessor, which could not have been Parliament’s intention. As to the FTT’s concern about the practical difficulties in identifying the income which may qualify for relief where the predecessor’s trade becomes subsumed into the successor’s trade, the court simply pointed out that ‘it is not permissible to disregard the words of a statute because of a perception of practical difficulty’; and that the difficulty could, in any event, be avoided with ‘careful record-keeping’.
Why it matters: The issue, which the Court of Appeal decided in favour of HMRC, exists since the enactment of FA 1965 s 61; the provisions were re-enacted in ICTA 1988 s 393 and now exist as part of CTA 2010 Part 22 Chapter 1. The issue is material to many business acquisitions and it will be interesting to see whether Leekes decides to appeal to the Supreme Court.
Writing in Tax Journal (8 June 2018), Mike Lane and Zoe Andrews observed: ‘The carry forward loss reforms that came into effect on 1 April 2017 relaxed the requirement that carried-forward losses can only be used against profits of the same trade (although the reforms also introduced a restriction for larger companies on the amount of taxable profits which can be offset). This means that in the context of a succession of trade, trading losses arising after 1 April 2017 can now, where the conditions are met, be carried forward and set against the successor company’s total profits, not just against the part of the profits attributable to the succeeded trade. The relevance of the Leekes judgment will be limited, therefore, to where losses arose before 1 April 2017 or where streaming is still required for post-1 April 2017 losses because the conditions for the more flexible offset are not satisfied.’
Also commenting on the judgment, Helen Cox and Kassim Meghjee wrote (Tax Journal, 21 June 2018): ‘For companies which are affected by the decision, a practical takeaway will be to keep clear records of future profits of the trade following the transfer of a trade so that historic losses can be properly streamed.
‘Another interesting point to note is that the Coles business was only carried on by Coles for one day after the acquisition by Leekes; the transfer of the trade took place on the following day. HMRC seemed to accept that this was sufficient for the successor provisions to apply.’
In Travel Document Service & Ladbroke Group International v HMRC [2018] EWCA Civ 549 (20 March 2018), the Court of Appeal found that debits under a loan relationship were not allowable under FA 1996 Sch 9 para 13.
TDS and LGI both belonged to the Ladbroke group of companies. TDS was a subsidiary of Ladbrokes plc, the group's parent company, and itself owned LGI. LGI in turn held the shares in a company with two trading subsidiaries, JBB and LCC. JBB was the lessee of numerous properties and LCC provided call centre services. The principal operating company of the group was LBG, another subsidiary of Ladbrokes plc. It had as a subsidiary LNIH, which itself owned a company based in Northern Ireland, NWB.
The group had implemented a scheme to generate a substantial tax advantage, while also allowing: (a) LBG to gain the benefit of JBB’s business in economic terms without the need to transfer all the leases that the latter held; and (b) LGI’s reserves to be extracted from it. The scheme was implemented using another subsidiary of TDS, Sponsio, which subscribed for shares in LGI, borrowed from Ladbrokes Finance (the financing company of the group) and used part of the monies to acquire LNIH, lending the balance to LNIH, which in turn lent to NWB. These transactions were followed by a total return swap entered into by TDS over the shares in LGI, a novation of the loans and the termination of the swap.
The key to the scheme was the reduction in the fair value of TDS’s shareholding in LGI, as a result of the latter taking on indebtedness of more than £253m pursuant to the novations. On the basis of this devaluation, TDS claimed a debit of £253,939,631 under FA 1996 s 91B. In addition, LGI claimed debits in respect of the interest it paid on the novated loans.
Under FA 1996 s 91B, the shares in LGI were treated as rights under a ‘creditor relationship’. The issue was whether TDS was barred from claiming the relevant debits under FA 1996 Sch 9 para 13, as it had entered into the swap for an unallowable purpose, the obtaining of a tax advantage. TDS contended that para 13 does not apply to deemed loan relationships but the Court of Appeal observed: ‘While it might have been preferable for Parliament to spell out more explicitly what it intended with respect to paragraph 13 when enacting the “shares treated as loan relationships” provisions, the point is double-edged: after all, were Parliament not to have wanted paragraph 13 to be applicable, it could have been expected to make that clear rather than (as I say) producing legislation which, on its face, suggests that paragraph 13 applied.’
The FTT also found that an unallowable purpose was established. Although TDS had not acquired the shares for tax purposes, it was evidently intending to use them in the tax avoidance scheme during the life of the swap.
LGI argued that for the purposes of para 13, debits should be attributed to the ‘unallowable purpose’ only if and to the extent that they would not have been incurred but for the tax planning. LGI observed that it would have incurred debits of the same amount even in the absence of the tax avoidance scheme. However, in the absence of any particulars submitted by LGI showing the loans it could have obtained, the FTT was not prepared to make such a finding.
Why it matters: In relation to TDS’s participation in the swap, the Court of Appeal noted that: ‘Had the tax advantage in view been small, there might have been scope for argument as to whether an intention to use the shares to achieve it implied that obtaining the advantage was now a main purpose of holding the shares. In fact, however, the hoped-for gain was large both in absolute terms (more than £70m) and relative to the apparent value of TDS (some £280m).’ This case therefore confirms that the actual value of the tax advantage is relevant when deciding whether it is a ‘main purpose’ of a transaction.
Writing in Tax Journal (20 April 2018), Heather Self observed: ‘Interestingly, the judgment does not refer to the so-called ‘Wilberforce comparator’, following the comments in IRC v Parker [1996] AC 141. In my article discussing para 13 (‘What is an unallowable purpose?’ Tax Journal, 3 October 2014), I said that ‘if the debits are no more than they would have been in a reasonable comparator, then no disallowance should result’. While that may remain true, the Ladbroke case has thrown significant doubt on this analysis – although, as I said in 2014, the evidence must be examined carefully, and in the Ladbroke case, the evidence of a comparator was insufficient to convince the courts.
‘And finally, an interesting point at the end of the first part of the judgment, relating to TDS, is that Lord Justice Newey disagreed with Mr Ghosh that ‘main’, as used in para 13(4), means ‘more than trivial’. He said: ‘A “main” purpose will always be a “more than trivial” one, but the converse is not the case. A purpose can be “more than trivial” without being a “main” purpose. “Main” has a connotation of importance.’
‘So “main”’ is more than trivial, with a connotation of importance – while “major”’ is more than significant, but less than fundamental. I hope that’s clear to everyone.’
In Project Blue v HMRC [2018] UKSC 30 (13 June 2018), the Supreme Court found (one lord dissenting) that, although the combination of Finance Act 2003 s 45 and s 71A brought the stamp duty land tax (SDLT) due to nil, the effect of s 75A was that SDLT was payable.
The issue was the SDLT payable on the purchase of the Chelsea Barracks from the Ministry of Defence (MoD) by Project Blue (PBL), using an Ijara lease, which is a form of Sharia compliant financing (as opposed to an interest-bearing loan). The sale comprised the following steps:
There were two issues: whether both sub-sale relief (s 45) and the exemption for alternative property finance (s 71A) applied; and, if so, how s 75A (the SDLT anti-avoidance provision) should apply to the transaction.
It was accepted that, as a result of s 45, the completion of the contract between the MoD and PBL was disregarded, and that s 71A could cover the arrangements between PBL and MAR. The central question was therefore the interaction between s 45 and s 71A, and particularly the identification of the ‘vendor’ under s 71A. The UT had found that PBL was the vendor under s 71A, whilst the Court of Appeal considered that the vendor could not be PBL because the transaction between the MoD and PBL fell to be disregarded under s 45.
The Supreme Court found that the vendor was PBL, so that MAR’s purchase of the barracks from PBL was exempt as a result of the combination of s 45 and s 71A. The court observed that s 71A uses ‘real world’ language and that whether the ‘customer’ of the financing arrangement (here PBL) has incurred a liability to SDLT before entering into the Ijara arrangements is not relevant to the applicability of s 71A. This approach is consistent with the aim of s 71A, which is to equate Ijara financing with conventional lending. There is nothing in the wording of s 71A, which suggests that the exemption will not apply where the sale by the customer to the financial institution is a sub-sale. Finally, this approach ensures that, in cases where the financial institution purchases the property from its customer, SDLT is not charged on the amount provided by the financial institution, but rather on the actual purchase price paid by the customer.
As to the application of s 75A, like the FTT, the UT and the Court of Appeal, the Supreme Court found that it was not precluded by the fact that it was not established that PBL had entered into the arrangements for tax avoidance purposes. The court observed, inter alia, that there is nothing in the body of the section which expressly or inferentially refers to motivation. It is sufficient, for the operation of s 75A, that a reduced liability results from the series of transactions put in place by the parties. Furthermore, the mischief the section addresses leads to the identification of V and P in each particular case (where one person (V) disposes of a chargeable interest and another person (P) acquires either it or a chargeable interest deriving from it). In the ‘real world’, PBL had acquired the barracks with the benefit of finance from MAR and the loophole which it had used was the combination of s 45 and s 71A; PBL was therefore P for the purpose of s 75A.
Finally, the chargeable transaction on the notional transaction was £1.25bn, as this was the largest amount paid under the arrangements. This was, however, subject to PBL’s right to claim a refund under s 80, if the consideration paid by MAR to PBL before the Ijara arrangement was brought to an end, was less than the amount paid by PBL to the MoD.
Why it matters: The SDLT at stake was £50m and the Supreme Court’s decision is not unanimous and reverses the Court of Appeal’s decision. In this context, the words of Lord Hodge ring particularly true: ‘I recognise the difficulty in interpreting the legislation which has been subjected to incremental amendments and additions since FA 2003, as Parliament has struggled to optimise this new tax.’ Fortunately, since March 2011, the issue of the interaction of s 45 and s 71A no longer arises as a result of an amendment to s 45.
Writing in Tax Journal (21 June 2018), Liz Wilson (Squire Patton Boggs) observed: ‘The SDLT planning at the heart of this particular case has already been blocked by changes made to the sub-sale relief rules, but the case remains instructive for the light it sheds on HMRC’s ability to use s 75A whenever a series of transactions combine to produce less SDLT than would otherwise have been payable on a notional simple transaction. The Supreme Court judgment is only likely to embolden HMRC further in seeking to invoke s 75A.
‘This rather unsatisfactory state of affairs allows HMRC to apply a provision that is widely (but now wrongly) understood to be a “normal” anti-avoidance rule, in any given set of circumstances where more SDLT could have been charged. Avoidance motive or not, deliberate or not, if HMRC can postulate a “notional arrangement” where the chargeable consideration “payable” exceeds the amount that would otherwise be payable, it could trigger s 75A.
‘Project Blue, therefore, is a case that necessitates a further recalibration in our understanding of where the boundary between acceptable tax planning and unacceptable tax avoidance lies. Despite reassurances in its published guidance that it will not apply s 75A if the “right” result of SDLT has been paid, the question remains on who decides (and how) what the “right” amount of SDLT is.’
In HMRC v P Newey (t/a Ocean Finance) [2018] EWCA Civ 791 (17 April 2018), the Court of Appeal decided to remit the case to the FTT, suggesting that the CJEU, on referral of the case after the FTT’s decision, had adopted a new approach to the application of the Halifax doctrine (Case C-255/02).
Ocean Finance made exempt supplies of financial services in the UK and was therefore unable to recover VAT incurred, in particular, on advertising services. On the advice of its accountants, the business had restructured so that it was carried out by a Jersey incorporated company, Alabaster, to which the advertising services were supplied. These services were outside the scope of VAT as they were supplied outside the UK. In all other respects, the business carried on as before. The loan broking services were still provided to third party lenders in the UK, in respect of loans made to UK resident customers recruited through advertising which was placed only in the UK.
The issue was whether the restructuring constituted an abuse of law under the Halifax doctrine. Both the FTT and the UT had found in favour of Ocean Finance. The Court of Appeal pointed to the CJEU’s comment in the present case that it was ‘conceivable that the effective use and enjoyment of the services at issue in the main proceedings took place in the United Kingdom and that Mr Newey profited therefrom’. The CJEU had concluded: ‘It is for the referring court, by means of an analysis of all the circumstances of the dispute in the main proceedings, to ascertain whether the contractual terms do not genuinely reflect economic reality.’
The court observed that Alabaster had been established with the sole object of providing supplies of loan broking services to UK customers but that the freedom of a trader to structure his business in a tax-effective manner had been ‘repeatedly recognised’ by the courts. The question was therefore whether it made any difference that Alabaster had been incorporated ‘as part of a tax avoidance scheme’.
The court considered that the CJEU’s decision required an assessment of the ‘question of artificiality’ by reference to the business relationships actually entered into by Mr Newey, Alabaster, lenders and the advertising company, and in particular, to the role of Mr Newey. This fact finding analysis would be best conducted by the FTT.
Why it matters: The Court of Appeal concluded: ‘There is no exact precedent of which I am aware in the earlier European case law, let alone as it stood before the FTT hearing in February 2010, for treating together the issues of characterisation of the supplies and the doctrine of abuse of law as the CJEU has done in the present case.’ In the view of the Court of Appeal, the CJEU’s decision changed the way the Halifax principle should be applied. It will be interesting to see how the FTT will apply this new approach, which seems to bring the Halifax doctrine close to the Ramsaydoctrine applicable to direct tax cases.
Writing in Tax Journal (10 May 2018), Michael Conlon QC made the following points (inter alia):
In A/S Bevola and Jens W. Trock ApS v Skatteministeriet (Case C-650/16) (12 June 2018), the CJEU found that the reasoning of its Marks & Spencer decision (Case C-446/03) applies to the losses of a foreign permanent establishment.
Bevola was incorporated in Denmark and produced ranges of products for wagons and trailers. It was a member of a group whose ultimate parent, Jens W. Trock, was also a Danish company.
Bevola’s Finnish establishment had closed in 2009 with losses, which it contended could not be deducted in Finland. It had therefore applied to set off these losses against its taxable profits in Denmark but its application had been turned down by the Danish tax authorities on the ground that Danish law did not allow the set off of losses realised by a permanent establishment situated outside Denmark.
The issue was whether Danish law was in breach of TFEU art 49 (freedom of establishment), since losses realised by a permanent establishment in Denmark could have been set off against taxable profits realised in Denmark.
The CJEU observed that the relevant Danish provision meant that a resident company with a permanent establishment in another member state is in a less favourable position than it would be if the permanent establishment was in Denmark. As established in Lidl (Case C-414/06), this difference in treatment could discourage a Danish company from carrying on its business through a permanent establishment situated in another member state.
The difference in treatment would not, however, constitute a restriction of the freedom of establishment if it did not apply to objectively comparable situations. In this respect, the court observed that the profits of a foreign permanent establishment of a Danish company are not taxable in Denmark. This may constitute an advantage in certain circumstances; however, in a situation such as Bevola’s, it is a disadvantage. The court also noted that the ultimate parent company of a Danish group can opt for international joint taxation and decide that all the companies in the group, resident or non-resident, including their permanent establishments and real property, inside or outside Denmark, are to be taxable in Denmark. However, as this option is subject to strict conditions, the court considered that the difference in treatment concerned situations which were objectively comparable.
The court accepted that the measure at issue may be justified to safeguard the balanced allocation of taxing powers, and more particularly, the necessity to avoid double deductions of taxes. However, it noted that, in circumstances where a set-off of losses is no longer possible in the country of the permanent establishment, the risk of double deduction no longer exists.
The CJEU concluded that the reasoning of Marks & Spencer in relation to the losses of foreign subsidiaries could apply equally to the losses of permanent establishments in circumstances where it is established that the losses are ‘definitive’; i.e. cannot be relieved in future accounting periods.
Why it matters: In this ground breaking decision, the CJEU has now confirmed that definitive losses of a permanent establishment in one member state can be set-off against profits of the company it belongs to, even if that company is incorporated in a different member state. On the basis of this decision, several provisions of CTA 2010 may need to be amended.
Writing in Tax Journal (29 June 2018), Tim Sarson noted that in addition to the CJEU concluding that the Danish legislation was contrary to the freedom of establishment, ‘the CJEU also clarified the applicability of the “Marks & Spencer exception”, ruling that the losses attributable to a foreign PE become definitive when firstly, all possibilities of deducting those losses that are available under the law of the PE’s residence state have been exhausted and, secondly, the company has ceased to receive any income from that PE.’
In Leekes v HMRC [2018] EWCA Civ 1185 (23 May 2018), the Court of Appeal (agreeing with the UT and disagreeing with the FTT) found that s 343 relief was only available against profits of the predecessor’s trade which was deemed to have been continued by the successor, and not in relation to the enlarged successor’s trade.
Leekes ran department stores. In November 2009, it had purchased the entire share capital of Coles, which ran furniture stores and warehousing facilities. Coles had losses in that tax year, as well as carried forward losses. Coles’ business had then been hived up to Leekes and Coles had become dormant. Leekes had refurbished the stores previously owned by Coles and rebranded them as Leekes stores.
In its corporation tax return for the year ended 31 March 2010, Leekes had offset Coles’ losses against its own trading profits, on the basis that it had succeeded to Coles’ trade (ICTA 1988 s 343). HMRC accepted that there had been a succession; however, it considered that set off was only available against any income generated by what was formerly Coles’ business. If HMRC was correct, no relief was available in the relevant year because that part of the enlarged business taken over by Leekes from Coles remained unprofitable.
The parties had agreed the following formulation of the issue: ‘Where a company succeeds to a trade of a predecessor in which losses have been incurred and that trade forms part of a larger trade carried on by the successor including its existing trade, how does ICTA 1988 s 343(3) apply to the successor in relation to carry-forward loss relief for those losses?’
The Court of Appeal observed that ‘the gateway to s 393(1) is opened for the successor, in respect of the accumulated losses of the trade which it has acquired and begun to carry on for itself. The next question is one of quantum: for how much of the accumulated losses of the predecessor is the successor entitled to obtain relief?’ To answer that question, the Court of Appeal referred to the second limb of s 393(1): the successor is entitled to relief ‘for any amount for which the predecessor would have been entitled to relief if it had continued to carry on the trade’. The court considered that the ‘trade’ could not be Leekes’ enlarged trade but only the trade deemed to have continued; Coles’ trade. The ‘deemed continuity’ only applied to Coles’ trade, so that relief could only be obtained if and to the extent that Leekes derived trading profits from Coles’ former trade.
The court added that Leekes’ approach would place the successor in a more favourable position than the predecessor, which could not have been Parliament’s intention. As to the FTT’s concern about the practical difficulties in identifying the income which may qualify for relief where the predecessor’s trade becomes subsumed into the successor’s trade, the court simply pointed out that ‘it is not permissible to disregard the words of a statute because of a perception of practical difficulty’; and that the difficulty could, in any event, be avoided with ‘careful record-keeping’.
Why it matters: The issue, which the Court of Appeal decided in favour of HMRC, exists since the enactment of FA 1965 s 61; the provisions were re-enacted in ICTA 1988 s 393 and now exist as part of CTA 2010 Part 22 Chapter 1. The issue is material to many business acquisitions and it will be interesting to see whether Leekes decides to appeal to the Supreme Court.
Writing in Tax Journal (8 June 2018), Mike Lane and Zoe Andrews observed: ‘The carry forward loss reforms that came into effect on 1 April 2017 relaxed the requirement that carried-forward losses can only be used against profits of the same trade (although the reforms also introduced a restriction for larger companies on the amount of taxable profits which can be offset). This means that in the context of a succession of trade, trading losses arising after 1 April 2017 can now, where the conditions are met, be carried forward and set against the successor company’s total profits, not just against the part of the profits attributable to the succeeded trade. The relevance of the Leekes judgment will be limited, therefore, to where losses arose before 1 April 2017 or where streaming is still required for post-1 April 2017 losses because the conditions for the more flexible offset are not satisfied.’
Also commenting on the judgment, Helen Cox and Kassim Meghjee wrote (Tax Journal, 21 June 2018): ‘For companies which are affected by the decision, a practical takeaway will be to keep clear records of future profits of the trade following the transfer of a trade so that historic losses can be properly streamed.
‘Another interesting point to note is that the Coles business was only carried on by Coles for one day after the acquisition by Leekes; the transfer of the trade took place on the following day. HMRC seemed to accept that this was sufficient for the successor provisions to apply.’
In Travel Document Service & Ladbroke Group International v HMRC [2018] EWCA Civ 549 (20 March 2018), the Court of Appeal found that debits under a loan relationship were not allowable under FA 1996 Sch 9 para 13.
TDS and LGI both belonged to the Ladbroke group of companies. TDS was a subsidiary of Ladbrokes plc, the group's parent company, and itself owned LGI. LGI in turn held the shares in a company with two trading subsidiaries, JBB and LCC. JBB was the lessee of numerous properties and LCC provided call centre services. The principal operating company of the group was LBG, another subsidiary of Ladbrokes plc. It had as a subsidiary LNIH, which itself owned a company based in Northern Ireland, NWB.
The group had implemented a scheme to generate a substantial tax advantage, while also allowing: (a) LBG to gain the benefit of JBB’s business in economic terms without the need to transfer all the leases that the latter held; and (b) LGI’s reserves to be extracted from it. The scheme was implemented using another subsidiary of TDS, Sponsio, which subscribed for shares in LGI, borrowed from Ladbrokes Finance (the financing company of the group) and used part of the monies to acquire LNIH, lending the balance to LNIH, which in turn lent to NWB. These transactions were followed by a total return swap entered into by TDS over the shares in LGI, a novation of the loans and the termination of the swap.
The key to the scheme was the reduction in the fair value of TDS’s shareholding in LGI, as a result of the latter taking on indebtedness of more than £253m pursuant to the novations. On the basis of this devaluation, TDS claimed a debit of £253,939,631 under FA 1996 s 91B. In addition, LGI claimed debits in respect of the interest it paid on the novated loans.
Under FA 1996 s 91B, the shares in LGI were treated as rights under a ‘creditor relationship’. The issue was whether TDS was barred from claiming the relevant debits under FA 1996 Sch 9 para 13, as it had entered into the swap for an unallowable purpose, the obtaining of a tax advantage. TDS contended that para 13 does not apply to deemed loan relationships but the Court of Appeal observed: ‘While it might have been preferable for Parliament to spell out more explicitly what it intended with respect to paragraph 13 when enacting the “shares treated as loan relationships” provisions, the point is double-edged: after all, were Parliament not to have wanted paragraph 13 to be applicable, it could have been expected to make that clear rather than (as I say) producing legislation which, on its face, suggests that paragraph 13 applied.’
The FTT also found that an unallowable purpose was established. Although TDS had not acquired the shares for tax purposes, it was evidently intending to use them in the tax avoidance scheme during the life of the swap.
LGI argued that for the purposes of para 13, debits should be attributed to the ‘unallowable purpose’ only if and to the extent that they would not have been incurred but for the tax planning. LGI observed that it would have incurred debits of the same amount even in the absence of the tax avoidance scheme. However, in the absence of any particulars submitted by LGI showing the loans it could have obtained, the FTT was not prepared to make such a finding.
Why it matters: In relation to TDS’s participation in the swap, the Court of Appeal noted that: ‘Had the tax advantage in view been small, there might have been scope for argument as to whether an intention to use the shares to achieve it implied that obtaining the advantage was now a main purpose of holding the shares. In fact, however, the hoped-for gain was large both in absolute terms (more than £70m) and relative to the apparent value of TDS (some £280m).’ This case therefore confirms that the actual value of the tax advantage is relevant when deciding whether it is a ‘main purpose’ of a transaction.
Writing in Tax Journal (20 April 2018), Heather Self observed: ‘Interestingly, the judgment does not refer to the so-called ‘Wilberforce comparator’, following the comments in IRC v Parker [1996] AC 141. In my article discussing para 13 (‘What is an unallowable purpose?’ Tax Journal, 3 October 2014), I said that ‘if the debits are no more than they would have been in a reasonable comparator, then no disallowance should result’. While that may remain true, the Ladbroke case has thrown significant doubt on this analysis – although, as I said in 2014, the evidence must be examined carefully, and in the Ladbroke case, the evidence of a comparator was insufficient to convince the courts.
‘And finally, an interesting point at the end of the first part of the judgment, relating to TDS, is that Lord Justice Newey disagreed with Mr Ghosh that ‘main’, as used in para 13(4), means ‘more than trivial’. He said: ‘A “main” purpose will always be a “more than trivial” one, but the converse is not the case. A purpose can be “more than trivial” without being a “main” purpose. “Main” has a connotation of importance.’
‘So “main”’ is more than trivial, with a connotation of importance – while “major”’ is more than significant, but less than fundamental. I hope that’s clear to everyone.’
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